If I told you that you could spend up to a third less on your medical expenses, would you be interested?
Well you can. It’s called the Flexible Spending Account (FSA), and it’s usually available through employers. This is an account that you put money into that can be used for certain health-care costs.
And while many of you may already know about this, I bet some of you are going “I’ve heard about those, but never looked into it.” Not to worry.
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The key benefit about the FSA is that the money you put in is pre-tax. If this means nothing to you, you can read this is as “everything is 30% or so cheaper” or “your money goes 30% farther”. That 30% is a rough estimate, related to your tax-bracket.
“Pre-tax spending” means a very good deal, in almost all cases. (Two notable exceptions that come to mind are IRAs and any life insurance products, both of which are typically better with post-tax money.)
Let’s see how. Say you put $1,000 into your FSA account in a year. Let’s also say that you’re in the 28% income tax bracket. So even though $1,000 gets deposited into your account, that money reduces your taxable income. That $1,000 would have been taxed at 28% (since it comes off the top), so you would only have netted:
$1,000 × (1 – 28%)
= $1,000 × (1 – 0.28)
= ($1,000 × 1) – ($1000 × 0.28)
= $1,000 – $280
So you sacrificed $720 in take-home pay, but got $1000 out of it. Bravo.
You can spend this money on prescriptions, doctor’s visit co-pays, and basically anything with a medical or dental context. (Here’s a giant and largely impenetrable list.) You can also buy a fair number of non-prescription items, though this is not always well advertised.
Limits and bummers
There are limits though in how much you can put away. (This is presumably to keep people from paying for their $100,000 in-patient treatment at a 30% discount, the scoundrels.) At the time of writing, the maximum limit is $2,550 per year, though this is indexed to inflation, so this will rise over time.
Which leads us to the bummers involved with this program.
First off, you have typically one chance during the year to sign up for an FSA (usually in December). Miss the deadline and you’re out of luck for a year. You also can’t change your allocations except during this time. Set it, and you’re stuck. So perhaps the word “flexible” is a little euphemistic in this case.
But here’s a bigger bummer (and also the reason why I’m writing this in March as opposed to in December, when you could actually sign up for a FSA): your money expires. If don’t use your money by the end of the year, it gets forfeited. Some employers offer a grace period, which usually is until March of the next year, but not all. But for those who have this grace period, this week, all the money left-over in this account went away. Super lame.
This is yet another instance of a system that gives you enough rope to hang yourself, like investing for retirement. If you don’t make good choices, you’re out of luck. I may enjoy the process of investing, but that doesn’t mean that I like having to do it.
Thankfully, some people with decision-making power are starting to realize how asinine this is, and recently instituted a new policy where, in lieu of the grace period, employers can allow money to rollover to the next year’s account. The catch is that only $500 can be rolled over, and there’s no grace period on this, so anything over that would be lost.
And of course, the employer needs to actually offer this. Not many do, though this is slowly changing.
A FSA for the self-employed
All this is only relevant to those who are employed in a traditional sense. What about the self-employed?
You can’t sign up for a FSA if you’re self-employed, but you do the option of enrolling in a Health Savings Account (HSA). This plan is attached to a high-deductible health plan, where anything above the deductible is paid for by the money in the HSA.
This actually seems more flexible than the FSA, in that the entire balance can be rolled over, not just $500. And the limits are higher too, being $3,350 for a single person at the time of writing.
How much do I put in?
Given all the parameters and options, this is an easy question to answer, at least in brief. You should put in the absolute minimum amount of money that you expect to need this year. You can find this out by looking at your previous year(s) of spending, and extrapolate from that. This of course won’t help if you have an unexpected event, but that’s at least part of what an emergency fund is for, not to mention having good insurance in the first place.
Better than nothing
The system of FSAs and HSAs could use some improvement. It’s confusing and places a lot of burden on the person to avoid the pitfalls (either missing out on the opportunity to sign up or having money forfeited).
But on balance, the ability to bring down costs of certain medical advice is a good thing. Like everything else, pay attention and be vigilant. And just like frequent flyer miles, don’t let that money expire.
But enough about me. Do you use an FSA or HSA? What has your experience been?